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Slower Chinese growth adds to pressure on leaders

By JOE McDONALD AP Business Writer

Posted:
05/16/2013 12:08:28 AM MDT

Updated:
05/16/2013 12:08:29 AM MDT

Click photo to enlarge

In this Tuesday, May 14, 2013 photo, workers are silhouetted at a construction site of a residential project in Rizhao city in east China's Shandong province. President Xi Jinping and other leaders have pledged to make the economy more productive but have yet to make clear how far they will go in curbing the dominance of state industry and making other changes reform advocates say are required. It is a politically thorny challenge but reform might be driven by slowing growth and concern about tensions due to a lack of new jobs. CHINA OUT

BEIJING—Global economic malaise has knocked the stuffing out of Luo Yan's business making toy animals.

Sales of Hello Kitty dolls and plush rabbits have fallen 30 percent over the past six months, according to Luo, owner of Tongle Toy Enterprise, which employs 100 people in the southern city of Foshan, near Hong Kong. Orders from the United States and debt-crippled Europe are down 80 percent.

"We don't talk about profits anymore," said Luo.

China's shaky recovery is losing steam, adding to pressure on its new leaders to shore up growth after a surprise first-quarter decline and launch new reforms to support entrepreneurs like Luo who create its new jobs and wealth.

"The current leadership is not taking this issue very easily," said Li Daokui, a Tsinghua University economist and former central bank adviser, at a financial conference organized by investment bank CLSA. "This is their first item: Make sure the economy doesn't slow down too much," Li said. "Second, regenerate the enthusiasm for reform."

President Xi Jinping and other leaders have pledged to make the economy more productive but have yet to make clear how far they will go in curbing the dominance of state industry and making other changes reform advocates say are required. It is a politically thorny challenge but reform might be driven by slowing growth and concern about tensions due to a lack of new jobs.

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April factory output and investment fell short of forecasts, adding to pessimism after forecasts of an upturn in growth were dashed by the decline in the first three months of the year, though to a still-healthy 7.7 percent from the previous quarter's 7.9 percent.

"Slow growth may trigger reform," said Citigroup economist Minggao Shen in a report.

Potential areas for change range from allowing private competitors into state-run industries such as telecoms to making it easier for entrepreneurs to get credit from banks that now channel most lending to government companies.

Market-style reforms were a low priority over the past decade. Beijing focused on building state-owned corporate giants in banking, energy and other fields and then responding to the 2008 global crisis by pumping up government spending. But the World Bank and other advisers warn that if it fails to allow more free-market competition, annual growth could fall as low as 5 percent by 2015—dangerously low for a Communist Party that needs rising living standards to underpin its claim to power.

Any change that threatens to cut revenue or resources for state industry will face political opposition. Analysts expect no major decisions until a party meeting in October. Li, the former central bank adviser, said party leaders are trying to settle on a reform plan that can revitalize the economy while still winning agreement from politically influential factions.

"These people are true believers in reform," Li said. "They have a strong sense of urgency that unless reforms are done, then social discontent may brew and then create conditions for drastic changes which will do no favor to anybody—that is, revolution."

This week, the top economic official, Premier Li Keqiang, suggested Beijing favors reform instead of stimulus to pep up growth—a strategy that will take longer to show results. He echoed warnings by private sector analysts that government investment is losing its effectiveness, with each new dollop producing less growth.

"To achieve this year's development targets, there is little room for stimulus policy or direct government investment, so it also must rely on market mechanisms," the premier said at a Cabinet meeting, according to a government statement.

Instead, he called for less "political power" in the economy to "motivate the creativity of market players," the statement said, without giving any details of possible changes.

Reforms would take time, making them "negative for growth and jobs in the near-term," said Citigroup's Shen.

China's growth still is stronger than the low single-digit expansions forecast in the United States, Europe and Japan. And dismay about its latest performance might reflect overly rosy forecasts and a narrow focus on economic output when Beijing also has other priorities such as improving social services and cleaning up China's battered environment.

But the impact of weaker factory production and less construction in the world's second-largest economy is starting to show at home and abroad.

Ni Shaoqing, the owner of a company in Shanghai that decorates restaurants and other businesses, said demand is weak because fewer companies are opening new outlets, while labor costs are rising. He said this year's profit will be down at least 20 percent.

"I expect fewer projects this year," said Ni, 49. "It is not the hardest year, but not an optimistic one, for sure."

A decline in China's voracious demand for iron ore and other raw materials is hurting Australia and other commodity exporters that prospered from its boom. Australian coal producers have cut jobs due to declining prices.

"The biggest risk is clearly, from our perspective, what happens in China," the chief financial officer of mining giant BHP-Billiton Ltd., Graham Kerr, said in April.

In an effort to show official concern about employment, Xi took the unusual step Tuesday of visiting a job fair for university students in Tianjin, east of Beijing.

Nearly 7 million university students graduate in July and as of April only 28 percent in Beijing and 29 percent in Shanghai had found jobs, according to the official Xinhua News Agency.

"Without economic growth, the employment issue can't be solved," the president said in Tianjin, according to Xinhua.

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